2016-04-14

Rent or Buy: Shanghai 2016

Buy: Spend 4.32 million yuan, 30 years later have a house

A house with an area of ​​70 square meters, the total price of 2.9 million yuan as an example. Xiao Ming working in Shanghai, 900,000 in cash, if you buy a house, then directly to the developers, buyers need 876,000 yuan down payment, choose a combination of loans, the Shanghai Provident Fund maximum loan amount is 1.2 million yuan, commercial loans 824,000 yuan , repaid over 30 years, the use of principal and interest equal way, the monthly repayment of 9600 yuan, 30 years pay back total principal and interest, plus pay a down payment before, Xiao Ming to spend a total of 4.3228 million yuan to buy a house!

Xiao Ming has to spend 9600 yuan per month before considering other expenses!

Renting: no real estate, own 3.525 million yuan of liquid assets after 30 years

If you use the same money to rent the same house, the situation is this:

First, deposit 900,000 yuan. Break it into 10 five-year time deposits. Bank deposit rates are now around 3%, 30 years later, about 810,000 yuan in interest, principal and interest totaling 1.71 million yuan.

In addition, Xiao Ming's 9600 yuan spare cash can be divided into two parts, 4600 yuan per month for rent, and the remaining 5,000 yuan for savings deposits, about 500 a year in interest, 30 years later, interest on deposits of about 15,000 yuan, principal and interest totaling 1.815 million yuan.

To sum up, after 30 years, renter Xiao Ming spends 1.656 million yuan and 3.525 million yuan can be saved, but there is no room.

Compare: in the end is it better to buy a house or rent?

From the above comparison, we can see, 30 years later, Xiao Ming spent more than 4 million to buy a house, what's it worth? To buy a house or rent this is most important factor! Therefore, we can easily see that if house prices rise faster, buying a house is a good choice; otherwise, renting is more cost-effective.

First off, there's a problem with the calculation: it didn't compound the interest on the 900,000 yuan. The money actually grows to 2.18 million yuan. The same mistake was made with saving 5000 yuan each month. It grows to 3.00 million yuan with compounding interest. That comes to 5.18 million yuan.

Buying looks good if you think home prices will rise an annualized 2% over the next 30 years, which seems like a good bet.

What if you can do better than 3% in the bank? It wouldn't be unreasonable to expect Chinese equities, currently yielding 2%-3%, won't also increase 2-3% per annum over the next 30 years. At a 5% return, the renter can amass 8.1 million yuan. Home prices need to rise 3.5% per annum to match the return.

What if equities could deliver a 7% total annualized return? The renter will have 13 million yuan in assets and the homebuyer needs the house to appreciate 5.1% per annum.

The wildcard is the relative valuation between equities and housing. If you think the government will support housing forever and never allow a meaningful decline, the slow and steady house appreciation is not a bad bet. If you think houses are overvalued and could experience a slower rate of appreciation over the next 30 years, equities start looking a lot more attractive.